Emerging Traffic Has Gotten More Diverse

Years ago, investing in an emerging-markets mutual fund was synonymous with investing in Asia’s up-and-coming stock markets. Today, you’re more likely to get a portfolio dominated by a mix of Latin American and Eastern European companies.

Simply put, the bloom is off the Asian rose. Fund managers have been shifting out of the region for more than a year because of slowing growth and other problems.

“Asian economies are in a cyclical downturn after 10 to 12 years of tremendous growth,” said Mark Madden, portfolio manager of the Pioneer Emerging Markets Fund.

By contrast, the economies of Latin America are on the upswing after having suffered through their own slowdowns. In addition, emerging-markets fund managers are finding opportunities in newly capitalist countries--not only in Eastern Europe, but also in the Middle East and Africa.

A recent survey by fund tracker Morningstar Inc. estimates that the typical emerging-markets fund has just 37% of its assets in Asian markets today, down from 58% at the end of 1992. Latin America’s share of the pie has increased to 31% from 27%. Even more dramatic, stock markets in other developing regions now account for 32% of fund holdings, up from 15%.

By comparison, the main emerging-markets index from Morgan Stanley Capital International shows a 45% weighting in Asia, 35% in Latin America and 20% in other regions.

The decline in Asia’s relative importance partly reflects the rise of capitalism around the globe. Places such as Russia and Poland didn’t even have stock markets or shareholder-owned companies several years ago.

It also comes at a time when most emerging Asian economies, with the notable exception of Hong Kong-China, are shifting downward.

Manufacturing overcapacity, brought about by a “massive misallocation of capital,” is at the root of Asia’s ills, said Joyce Cornell, who runs the Scudder Emerging Markets Growth Fund. Not only did exporters find it too easy to borrow money for expansion, but governments encouraged them with tax breaks, other subsidies and protectionist policies.

“These countries haven’t been thinking about returns on capital,” said Cornell, whose fund has just 15% of its assets in Asia. “All they think about is building market share and selling their products.”

The result is overcapacity in a range of industries from shipbuilding to computer chips, with many Asian nations lacking a sufficient home market to sustain their industries during the slowdown.

The export drive of years past also diverted money from other projects such as highways, pollution control and resource management programs. As a result, the region suffers from growing pains ranging from traffic bottlenecks in Malaysia to the thinning of hardwood forests in Thailand, said Josephine Jimenez, who runs the Montgomery Emerging Markets Fund. In addition to posing quality-of-life issues, these problems are crimping economic growth.

Then there are the currency woes. Many countries in the region have traditionally pegged their money to the U.S. dollar, an arrangement that worked especially well when the greenback was weak. But lately the dollar has been rising against the German mark and Japanese yen, which has made Asian goods more costly in world markets. “This has put the export competitiveness of these nations under strain,” Pioneer’s Madden said.

The recent devaluation of the Thai baht reflects the new realities. That action, in turn, has put pressure on the currencies of economic rivals in the region. Although beneficial for these countries in the long run, currency weakness makes them less appealing from the standpoint of U.S. and other foreign investors.

Of course, all this is now conventional wisdom, so maybe Asia has become a buying opportunity.

Mark Mobius, who runs the Templeton Developing Markets and Emerging Markets funds from offices in Hong Kong and Singapore, is more optimistic than many of his colleagues about Asia’s prospects. These countries are having a rough time because previous booms, fueled by excessive lending, got “overdone,” he said.

“These problems are temporary and will be overcome eventually,” Mobius said. Even so, Templeton funds have trimmed their Asian weightings to about one-third of assets, with roughly another third invested in Latin America.

As for Latin America, the economy is on a growth track after a period of uncertainty begun with the collapse of the Mexican peso in late 1994. Because the region traditionally has not enjoyed the strong capital inflows that Asia has, it is not grappling with the same overcapacity issues.

“Unlike Asia, Latin America has been capital-starved for more than a decade,” Cornell said. This situation, she said, is more conductive to reaping high returns on investments now being made.

Other positive factors for the region include solid currencies, privatization of state-run industries, a trend toward democracy and possible expansion of the North American Free Trade Agreement to include nations in South America.

It also helps that stocks there are cheaper than in Asia. For example, stocks in Brazil and Mexico are trading at a modest 11 times expected 1998 profits, Jiminez said.

The most dramatic investment shift for emerging-markets funds has involved nations in other developing regions--primarily Eastern Europe, the Middle East and Africa.

The fall of the Berlin Wall in 1989 tore down the credibility of socialism throughout the world, not just in Eastern Europe. “There has been a wholesale switch globally to market economies,” Cornell said.

But although Cornell and other portfolio managers voice generally positive sentiments for Latin America, their outlooks for these other regions vary considerably.

For example, Madden has fairly large holdings in Israel and Turkey but avoids Eastern Europe and Russia. Jiminez has taken a substantial stake in Russia and Eastern Europe but is downplaying the Middle East. Cornell has assumed big positions not just in Eastern Europe and the Middle East, but also in sub-Saharan Africa.

What it all boils down to is an unprecedented smorgasbord of investment opportunities for managers of emerging-markets funds, with choices no longer dominated by a single region.

Some specific emerging-markets funds and their recently reported regional weightings:

* Montgomery Emerging Markets. 42% Asia, 40% Latin America, 18% other. (800) 572-3863

* Pioneer Emerging Markets. 40% Latin America, 26% Asia, 34% other. (800) 225-6292

* Scudder Emerging Markets Growth 37% Latin America, 15% Asia, 48% other. (800) 225-2470

* Templeton Developing Markets. 33% Asia, 33% Latin America, 34% other. (800) 292-9293

* Vanguard Emerging Markets Index. 45% Asia, 30% Latin, 25% other. (800) 662-7447